§936b Sale or Prepayment of Direct or Insured Loans

Summary

Electric borrowers may buy out or prepay their federal direct or insured loans early in certain cases. Normally loans cannot be sold or prepaid for less than the unpaid principal. But if the loan was made before May 1, 1992 or has been in place at least 2 years, the borrower can ask to prepay. The payoff amount is whichever is smaller: the unpaid principal or the loan’s present value figured using a discount rate set by the Secretary. That discount rate is the Treasury’s current cost of funds for debts with similar time left. If a borrower uses tax-exempt financing to prepay, the discount is adjusted so the borrower gets the same benefit as if they used taxable financing, and the borrower must say in writing if the financing is tax exempt and follow other reasonable rules the Secretary sets. Prepaying affects future loan eligibility. If a borrower prepays at the Treasury-based discount rate, they generally cannot get new direct or insured loans for 120 months unless the Secretary allows it. If a borrower prepaid before October 21, 1992 at a larger discount, they generally cannot get loans for 180 months unless the Secretary allows it, or until they repay any excess discount plus interest at the Treasury’s average borrowing cost. Prepayments by merged electric organizations that involve a borrower who prepaid before October 1, 1987 follow similar rules and must be done within one year of the merger. Direct loan = loan under section 904. Insured loan = loan under section 935.